Foreclosures: Suspect Situation or a Steal?

Story & Photos By Lyndsey Garza

Before 2008, I had heard of foreclosure sales happening in other areas of the nation on the morning news before heading to the office. As a fairly new agent coming straight from a prominent developer handling their sales, I will admit that I knew nothing about these situations, other than the owner wasn’t paying their monthly mortgage. I had never even shown a foreclosed property, much less spoken with a buyer about one. The market had started to decrease a bit, but life was still great as a Galveston Island Realtor®. The foreclosures that began slashing property values had not invaded our little paradise. Yet.

Wow, did I learn some quick lessons on selling and buying distressed properties in early 2009. Let me just throw a couple of words/phrases out there: short sales, asset manager, tons of scary pro-seller documents to show your clients, no seller’s disclosure. Wait, did I mention short sale? And don’t forget the addendum from the seller that technically overrides the Texas Real Estate Commission contract that was used to submit the offer. What? All of a sudden part of my day had been devoted to calling mortgage companies. I rarely called my mortgage company myself, but never on behalf of someone that I had never officially met in person and was granted access to all of their financial information per the borrower’s permission. In the fourth quarter of this year, an estimated 60 percent of my business was representing sellers aiming for the short sale and mostly, representing and guiding my clients in buying a foreclosed property.

There has been a lot of media directed towards the number of foreclosed properties available, the government bailing out irresponsible companies, decreased property values and how this affects the housing market as a whole. Quite frankly, it’s confusing and then the government changes their mind or implements a new rule or stipulation for the buyer. I would like to share some of the knowledge and experience I have learned during the past two years and inform you as a consumer.

Foreclosure: a legal proceeding that bars or extinguishes a mortgagor’s right of redeeming a mortgaged estate. [1]

Short sale: a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. [2] It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure.

Robo-signing: a term used by consumer advocates to describe the robotic process of the mass production of false and forged execution of mortgage assignments, satisfactions, affidavits and other legal documents related to mortgage foreclosures and legal matters being created by persons without knowledge of the facts being attested to. It also includes accusations of notary fraud wherein the notaries pre- and/or post-notarize the affidavits and signatures of so-called robo-signers.[3]

I thought providing the definitions of the two main types of distressed sales you hear about would be helpful since they are confused frequently. I find that an estimated 75 percent of my customers and potential buyers either have no idea how a short sale works or are misinformed regarding various steps of the process. This article is going to focus on foreclosures since short sales are very different transactions.

Galveston Real Estate Statistics - Nov 2010

Why buy a foreclosure? There are many pros associated with the purchase of a foreclosed property. Let’s take them one at a time:

• Low price. Foreclosed properties tend to typically sell for five to ten percent less than the current market value, sometimes even discounted more in distressed areas.

• Buyer will obtain a clear title. REO properties (real estate owned by lenders or government) will provide a clear title to the buyer at closing. Buyer will not assume mortgage, liens or back taxes.

• Advantageous ventures as a possibility. Properties can be purchased for a great value, used as rental properties, and then sold when the market picks up.

• Normal escrow time for closing. REO sales usually close in a normal escrow period of time. This typically ranges from 30 – 45 days.

• Get that ‘honey do’ list ready. If a little remodeling and home improvement projects don’t scare you, this can be a great way to build value in a damaged or vandalized property.

• Inspections can be done. REO properties will allow for the buyers to perform thorough inspections on the property within a pre-determined amount of time after contract is accepted by both parties and executed. This is a great reassurance to anyone purchasing a foreclosed property.

• No move-in delays. Foreclosed properties are vacant, so if all is well, the property can be put to use after closing documents are signed and the file has funded.

• Lower closing costs and flexible financing. These incentives are sometimes offered to buyers buying their primary residence.

Why purchasing a foreclosure doesn’t fit everyone’s agenda:

• Banks typically won’t do any repairs. Buyer will be purchasing the property ‘as-is’ or in its current condition (pending buyer’s approval of inspection, of course, if property is a REO).

• Condition of property. This should always be a concern. Lucky buyers can end up with a property in great condition, while other properties run the risk of having being vandalized, vengeful previous owners taking fixtures, and appliances missing. Always consider the hidden costs that may exist in purchasing new appliances, ceiling fans, etc. I have even seen a home so ravaged by the previous owners that the copper wiring was stripped out of the walls!!

• Banks will not supply property disclosures. As in a “typical” real estate transaction that you may have experienced, the buyer will not receive a seller’s disclosure of property document. Generally, these banks have never even seen the property or know any history regarding the property’s previous use. Inspections usually calm nerves due to this concern.

• Banks require additional paperwork. As I mentioned previously, the bank will provide additional paperwork required for the buyer to sign and agree to. These documents are very seller-biased, but if there are concerns, an attorney can review them. (They are getting very used to seeing them and most are very similar.)

• Full cooperation from buyer who must also be very patient. After submitting an offer on a foreclosed property, the waiting game begins. I have received communications as soon as the same day, and have also waited for a bank’s response for up to a week. Remember, this is simply a business transaction to the seller – there are no emotions in play here. Ironically, after waiting patiently for the seller’s response, the buyer and their Realtor® must jump when they say jump. Once the offer becomes an executed contract, the clock starts ticking. Title companies usually expect earnest money in the form of a cashier’s check sent out overnight!

Research, Representation, and Preparation = Success in Purchasing Foreclosures

If a buyer is considering looking at a foreclosure or purchasing a foreclosed property, three things should be done to make the transaction as easy and stress-free as possible:

• Research. Buyers need to do their own research to make sure they are educated for their own comfort level. If you know others that have purchased a foreclosed property, ask them about how their experience was.

• Representation. Make sure that you are working with a Realtor® that has experience negotiating and closing foreclosures to guide you through the process. This agent’s job is to represent your best interests before, during, and after the transaction. Be sure to have buyer’s representation & leave the work to us Realtors®. The bank pays your agent at closing, so why would you not make sure you have an experienced agent on your side?

• Preparation. As I mentioned above, make sure that you have all of your ducks in a row so that you are prepared to “jump” once the bank has accepted your offer. Your Realtor® should be a huge help here, but be prepared to go ahead and get a pre-qualification letter from a lender if financing, proof of funds if paying cash, and be ready to run out to the bank for that cashier’s check and then straight over to FedEx!

Happy New Year! Freddie Mac seems to think so.

I would also like to share Freddie Mac’s thoughts regarding what we should expect out of the real estate market in 2011. Freddie Mac analysts point to five features that they believe will likely characterize the 2011 housing and mortgage markets.

• Low mortgage rates.

• Prices have hit bottom. House prices are likely to begin a gradual, but sustained recovery in the second half of 2011.

• Housing will remain affordable. With affordability high, many first-time buyers will be attracted to the housing market in the New Year, likely translating into more home sales in 2011 than in 2010.

• Refinances will dwindle. Many eligible borrowers have already refinanced and the federal Making Home Affordable refinance program is expiring on June 30. While fixed-rate loans are likely to remain low, they will move up gradually, making it even less likely that refinances will be attractive to most home owners.

• Delinquency rates will decline. Based on the last several business cycles, the share of loans that are 90 or more days delinquent or in foreclosure proceedings — known as the “seriously delinquent rate” — generally crests within a year of the start of the recovery in payroll employment, and this economic recovery appears to fit within that pattern. Payrolls began to rise last January, and by the spring the seriously delinquent rate had begun to fall.

Source: Freddie Mac (12/09/2010)

I am always looking for topics to write about, please feel free to e-mail me with any suggestions. Also, if you would like to see an additional area/neighborhood of the island included in the statistics I provide, please let me know.

I would also like to extend a thank you to the Sand N’ Sea real estate office, located in Pirates Beach, for the Galveston 2010 third quarter statistics used in December’s issue. Happy New Year and I hope all of us islanders (and islanders at heart) have a prosperous and joyful 2011.

Lyndsey Garza is a Galveston resident and real estate agent with Galveston Real Estate Resource, LLC. She can be reached at lyndsey@condosofgalveston.com

Sources: [1] Merriam – Webster Dictionary, [2] Nolo’s Plain-English Law Dictionary, [3] www.time.com.

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